India Markets Weekahead – Company results key for market direction

(Any opinions expressed here are those of the author, and not necessarily of Thomson Reuters)

Infosys stumped Indian markets again but for a change — positively. Recent management comments had built expectations of underperformance which led to cautious to negative views on the stock. Institutional investors were light on Infosys whereas the more adventurous speculators were short. And we were all caught on the wrong foot when the company declared a revenue growth as well as a net profit much better than consensus expectations.

The question is whether one should buy Infosys after this 17 percent surge? I would continue to be cautious as I believe the knee-jerk reaction is overdone. Does a better performance put Infosys back in line with the guidance given at the beginning of the year? Not really. Could this be a one-quarter wonder? It’s possible and I would await another quarter for confirmation.

The consensus on the street was that markets could be heading for new highs soon and this possibly was the biggest risk they have been facing in the short term. If not for Infosys, the markets may have broken important support levels on Friday. Unlike the underlying confidence in the past few weeks, the markets have displayed weakness in the last few days closing about a percent lower at 5952.

Though the government deferred a decision on raising fuel prices, it went ahead with a train fare hike before the railway budget, a bold move after nearly a decade.

Talks of deregulation of diesel prices for bulk users would reduce the subsidy burden but would also hit a number of industries, especially cement. Most cement heavyweights lost between five percent to 10 percent last week.

IIP numbers show a slight contraction but were in line with expectations that the data would show an upward movement after December. The trade deficit rose to $17.7 billion from $14.7 billion last year. Gold import curbs and the increase in fuel prices should hopefully curtail the demand growth thus reducing the import bill. The Fitch downgrade threat and Citi downgrading India to “underweight” did have an impact but is not expected to last long.

The coming week is earnings heavy with TCS, Axis Bank, Bajaj Auto, HCL Tech, Hero MotoCorp, Wipro, Reliance Industries, ITC and HDFC Bank unveiling their results. After Infosys, the burden of exceeding expectations would fall on HCL Tech and TCS which have been outperformers in the pack for the last few quarters. We could see a shift to the IT sector in the short term if TCS, HCL Tech and Wipro meet or exceed expectations. Inflation data will be announced on Monday and should be around 7.3 percent.

Company results could be key for market direction in the next few weeks. The RBI policy at the month’s end is also a trigger for the market with expectations of a rate cut of 25-50 bps.

Though the markets seem a tad edgy at support levels of 5940/5950, I would suggest holding long positions unless the market breaks 5900 levels. I still hold my initial targets of a new high in the near future as the government is taking the right steps to get the economy back in shape. The December quarter results could be one of the catalysts that would put the market back on track.